Although fictional, the film weaves events drawn from several real sources into the story. The Sunshine family's liquor business was based on the Zwack family's liquor brand Unicum. One of Fiennes's three roles is based at least partly on Hungarian Olympian Attila Petschauer, but also includes allusions to the early life of Miksa Fenyő and other famous Hungarians of Jewish origin who suffered from anti-Semitism and the persecution of Jews in World War II Hungary.[citation needed] Another role in the film which is similar to that of a historic person is the character Andor Knorr played by William Hurt which closely resembles the latter part of the life of László Rajk.

The 19th-century patriarch of the Hungarian-Jewish Sonnenschein family is a tavern owner, who distills and makes his own popular liquor in Austria-Hungary. From the recipe, the liquor, called "Taste of Sunshine", is commercially made by the next generation of the family who gain great wealth and prestige from the business. That generation of the family lives many happy and privileged years and the children are highly educated. The oldest son, Ignatz, a fast rising judge, falls in love and has an affair with his first cousin, Valerie, against his father's wishes. The second son, Gustave, becomes a medical doctor. Ignatz is asked by a chief judge to change his Jewish surname if he wishes to be promoted within the judiciary. Ignatz, his brother, and his cousin Valerie all happily change their last name to Sors - a "more Hungarian" name.

Ignatz and Valerie marry and give birth to a healthy son. Ignatz struggles with the political battles in start of the 20th century Hungary. He struggles with hiding his Jewish identity in order to rise within his profession and the higher social classes. Ignatz curses his communistic brother for opposing the rule of Emperor Franz Joseph. World War I breaks out and both brothers continue rise within their professional and military ranks. Both the Emperor and Ignatz's father die around the same time, taking a great toll on Ignatz. After the war is over, the liberal monarchy collapses, causing Ignatz to lose his judicial position. Gustave rises to a position of power in the emerging communist government. Compounding Ignatz's conflicts, Valerie announces she plans to divorce Ignatz. In a fit of anger and confusion, Ignatz rapes Valerie. Gustave offers Ignatz a position in the communist government, but Ignatz refuses to be a part of the policies of retribution against the previous members of the monarchy. Ignatz and his family are put under house arrest. Upon hearing this news, Valerie returns to be with her imprisoned family. Soon thereafter, foreign militaries intervene to overthrow the communist government. The new regime asks Ignatz to oversee trials of retribution against the communists. He declines and is forced to retire. His health deteriorates rapidly and he dies, still regularly fighting with Valerie.

The fictional Emmanuel Sonnenschein and co. liquor company building in Budapest. The film crew left the painting and all other decorations they have installed on the building, thus they are still visible there (Bokréta utca 15., District IX, Budapest)

The story turns to the next Sors generation: Ignatz' younger son, Adam Sors, is talented at fencing at the Jewish run Civic Club. In order to compete at the highest levels of fencing, Adam must convert to Christianity because no Jews are allowed in the top military fencing club. Adam converts and hides his Jewishness further, like his father did before him. Adam is obsessed with winning social stature, athletic competitions, and his romantic pursuits, pursuing and marrying Hannah Wippler, a woman who was already engaged to another man. He struggles with issues of personal pride in the face of anti-Semitic prejudice. Adam wins the national fencing championship 2 years in a row.

Adam and Hannah have a son, Ivan Sors. Adam is offered half a million dollars by a group of Jewish financiers to rejoin his old Civic Club team. Adam refuses, not wanting to give up his chance at competing in the Olympics, not wanting to lose his association with the Christian upper class "gentlemen," and not wanting to be associated publicly with Jews. He responds to the offer by stressing fencing requires the common work of a team, and achievement in the sport cannot be gained from individual effort. The irony in his comments is what is unsaid: In order for him to be a part of a winning team, he must disassociate from the Jewish teams from generations of his family. Adam expresses to his sister-in-law, Greta (Rachel Weisz), his own anti-Semitic prejudicial perceptions and contempt toward "little" Jews who are "all the same." Adam, a Jew by heritage, soon thereafter is reminded that other non-Jewish military members of the Officer's Club fencing team still consider him a Jew and are looking for the first opportunity to harm him because he is a Jew.

During the decisive Olympic fencing match during the 1936 Summer Olympics in Nazi Germany, Adam's blade breaks; as he decides which sword to choose as a replacement, he quietly whispers the Christian Lord's Prayer. He wins the match, giving Hungary an Olympic gold medal and giving his military officer teammates and his countrymen great pride in their "national treasure" and "national hero." After winning, he is offered the chance to move to America to join a U.S. team. He declines, again preferring to be esteemed as a Hungarian. He is warned that Hungary is following in Nazi Germany's footsteps and he and his family should leave the country before it is too late. Adam chooses to stay in Hungary. Adam has an affair with his sister-in-law Greta. Adam wishes to keep up appearances and his reputation, so he keeps the affair secret.

New Hungarian laws are passed by the parliament discriminating against people with any near Jewish ancestors. The Sors family feels shielded by the knowledge their military service, Olympic medals, and other characteristics are allowed exceptions, allowing them to not be legally defined as Jews. This initially prevents them from being discriminated against as Jews. However, Adam is soon expelled from the military fencing club. Greta begs Adam to move with his family out of Hungary. Adam decides to stay. Greta then implores her entire family to leave Hungary, in order to save their children. The family decides to stay, wanting to maintain their existing wealth and standing, fearful that other places will not be substantially better than Hungary. Too late, the family is finally persuaded, but quotas are filled, borders are closed and they are not allowed to leave Hungary.

Adam's former military commander, General Jakofalvy, who is not anti-Semitic, realizes Sors' family is likely doomed. He apologizes to Adam, saying, "Sors, there's something I once said to you, that 'assimilation was the right choice.' I'd like to ask your forgiveness for having said that. I was profoundly wrong." Hannah, Adam's wife, likely knowing of the affair with Greta, and knowing her marriage to him creates one more Jewish association, asks Adam if he still wants to be married to her. Adam honorably and honestly says, "Yes, yes." Germany occupies Hungary and Adam's wife and mother are immediately moved into the Budapest Ghetto. Hannah is killed sometime after being marched toward a concentration camp. Valerie, Adam's mother, escapes and hides in a friend's attic. Adam and his son Ivan are sent to a labor camp. Adam is called out of the group by a camp guard because of Adam's proud demeanor and defiance, declaring he is a Hungarian military officer and Hungarian Olympic champion. The guards make an example out of him, stripping him naked in the snow, tying him upside down to a log, breaking his bones, and demanding he denounce his declarations of pride and instead cower because he is a Jew. They hose water on him until he dies, frozen in ice. Over a thousand Jewish prisoners, including his son Ivan, sit idle, watching him slowly tortured to death. Greta, István, and their son are dragged from their home and shot on the banks of the Danube river.

Valerie, and their long-time family servant, return separately to the family home. Gustave Sors, Valerie's long separated brother, returns home to support the new Hungarian pro-Stalin communist government. Ivan also returns home, letting Valerie know her younger son Adam was murdered in camp because Adam wouldn't admit he was a Jew. Ivan is ashamed he hid the fact he was Adam's son while he watched his father beaten to death. Ivan gets a job with a local communist official, Andor Knorr, as a policeman, gathering up members of the previous "fascist" Hungarian political regime for prosecution. He hypocritically prosecutes others who, like Ivan, stood by and did nothing as others were persecuted. Ivan asks his interrogatees to write down names of their colleagues, trying to create an appearance of finding more government opposition members. Ivan rises quickly in the communist ranks. He has a sexual affair with Maj. Carole Kovács, the wife of a high ranking communist official.

Fears and suspicions grow quickly in the new Hungarian communist government, and as with previous regimes, Jews are feared to be inciting conspiracies against the government. Ivan is enlisted to hunt and indict Jews. Andor Knorr, a lifelong communist with Jewish heritage, is accused of being a leader of a Zionist conspiracy. Ivan harshly interrogates Knorr, seeking a confession, knowing that if he cannot obtain a false confession, then interrogation will likely be redirected to Ivan and his family. Knorr will not confess and is tortured to death. Maj. Carole Kovács, fearing reprisals from being associated with Ivan, leaves him. Ironically, Ivan is asked to speak at Knorr's funeral, where he shares a quote passed down through his Jewish family: "We are afraid to see clearly and of being seen clearly." In 1956 the communist regime is challenged. Ivan has left the police force and is a leader of the rebellion. Ivan is arrested after the rebellion fails. He is interrogated in the same way he interrogated Knorr and is imprisoned for his political activities. Upon release, he returns to live with his grandmother Valerie. She tells him, "Politics has made a mess of our lives. Still, life was beautiful. I've enjoyed waking every morning. I've always tried to photograph what's beautiful in life, but it hasn't always been easy." While still looking for the missing family liquor recipe, she has a heart attack and dies soon thereafter. The recipe book is never found, till Ivan finally moves out of the family home. The cloth bound recipe book is disposed of as one more unrecognized piece of family memorabilia. In the final scenes, Ivan changes his name from Sors back to Sonnenschein.